[Updated for 2021] So, you sold your commercial property investment. You’ve revelled in the profits and celebrated a well-made investment decision. But long after popping the champagne you turn your attention to a less celebratory event – Capital Gains Tax (CGT).
Chances are, if you’ve sold a commercial property, the disposal will be subject to capital gains tax. CGT on commercial property can water down your investment return and often be a complex tariff to mitigate against.
However, when investors prepare appropriately and understand key elements of capital gains tax on commercial property, their pain can be appeased. Here we’ll show you how.
But before we look at how investors can plan for notorious CGT events, let’s breakdown a fundamental question.
What is CGT?
As most investors know, when you make a net capital gain after parting with your investment (i.e. the difference between the cost to acquire the asset and its sale proceeds) you’ll be liable to pay capital gains tax.
This can be averted in some cases and we’ll get to that shortly.
The capital gain is added to your taxable income and may increase the amount of tax you need to pay (even having potential to bump you up into a higher tax bracket).
The Australian Tax Office states that your capital gain (or loss) is established on the date you contract to dispose your asset – not on the date of settlement. Meaning if you sign a contract in June 2021 to sell your asset but settle in September 2021, your capital gain must be included in your 2020/21 tax return.
This may seem trivial but can have substantial impacts depending on your investment activity for the year.
Preparing for a capital gain
Understandably, investors can be so focused on putting their asset through rigorous value-adding that they forget to plan against the CGT their efforts may create.
Wary commercial property landlords will build tax liabilities into their planning before or during acquiring commercial property.
Keeping receipts and records of all deductible expenses associated with your investment will help you understand your asset’s total cost base. This is the amount used to calculate the overall capital gain, by deducting it from the total sale proceeds of your asset. The higher the cost base, the lower the capital gain.
As tax is not withheld on a capital gain from your investment (in the same way as an employee’s PAYG salary), it is wise to work out what amount you will need to pay to the taxman. Experienced investors will set aside sufficient funds to cover the potential amount owed.
The same investors know how to reduce this amount.
How CGT can be discounted
For properties held for more than 12 months, CGT can be discounted (reduced) using any one of these three methods:
Allows you to reduce your capital gain by 50% for residents and trusts and 33.33% for complying super funds.
Indexation method (for assets acquired pre-September 1999)
Allows owners to increase the cost base of their assets by applying an indexation factor based on the CPI up to September 1999. Once you have the indexed cost base, subtract this amount from the sale proceeds.
Other method (if owned less than 12 months)
This is the basic method whereby you will simply deduct the sale or capital proceeds by the cost base of the asset.
You’re able to choose which method you apply to your asset. So, choose the one that provides the best result (being the smallest capital gain).
[Note: Companies are unfortunately not able to discount their capital gains tax and will pay company tax of 30% on any net capital gains.]
Important considerations with CGT
International investors & investments
In today’s globalising economy, many have investments sitting abroad (shares in overseas exchanges, real estate on foreign soil, etc). You may have done all you can to minimise CGT on disposal of your Australian investments. However, these discounts and concessions can be eroded by disposing of well-performing assets in other countries.
Inversely, a foreign resident will only be taxed on capital gains for assets the ATO classes as ‘taxable Australian property’.
Converse to the woes of an asset sale creating a CGT even, those who have worn a capital loss from an investment can use this to their advantage in future tax returns.
Capital losses can be brought forward from previous years and used to reduce a capital gain from separate investment disposals. But these losses cannot be applied to other income (such as a salary or residential rental income).
Owner occupied premises
Unlike owner occupiers of residential property, businesses which own the premises they occupy are still subject to capital gains tax when selling that property.
However, there are discounts applicable to businesses who are both tenant and landlord [found on the ATO website].
20 September 1985
This is the date that CGT was introduced in Australia.
Why is it important?
Well, any commercial property that was acquired before this date – termed a “pre-CGT asset – will typically not be liable for capital gains tax. If there has been no change of ownership since this time, the tax office will not assess its capital gain.
Please note that this information is only a basic overview of CGT, its implications and its concessions. CGT is a complicated topic. It is best to consult with a tax professional before acquiring and disposing of your commercial property asset.
Alternatively, you can remove the complexity by investing alongside an experienced commercial property syndicator. For more information, get in touch with Properties & Pathways. Over 60 years’ experience in commercial property investment has given us market leading insights into CGT – and how to mitigate against it.